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EEP 101/ECON 125 Lecture 16: Environmental and International Economics


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Title: EEP 101/ECON 125 Lecture 16: Environmental and International Economics

EEP 101/ECON 125 Lecture 16 Environmental and
International Economics
  • Professor David Zilberman
  • UC Berkeley

Trade and transfer of species
  • Environmental considerations expand the range of
    issues affecting economic relationships between
  • International considerations expand the economics
    of the environment.

Basic or trade economics
  • Gain from trade
  • Relative advantage
  • Stolper Samuleson
  • Gains from transfer of species
  • Gains from Trade barriers

Relative advantage and trade
  • Country A
  • a worker produces 2 shirts or 3 breads
  • Country B
  • a worker produces 4 shirts or 2 breads
  • 10 workers in each country
  • Country A has relative advantage in bread
  • Country B has relative advantage shirts
  • Price of bread before trade
  • 2/3 shirts in A
  • 2 shirts in B
  • After trade it is 70/55

Gains from trade
  • Suppose before trade each country allocated
    resources among activities
  • Country A produces 10 shirts and 15 breads
  • Country B produces 20 shirts and 10 breads
  • Total 30 shirts and 25 breads
  • After trade there is specialization
  • Country a produces breads- 30 of them
  • Country B produces 40 shirts
  • The exact equilibrium and trade pattern depends
    on tastes, technology and endowments

Exporting Environmental quality when it is
A outcome without trade B with trade AC export of
EQ CB import of food DB utility gain from trade
Environmental quality
International Price ration
Patterns of trade
  • The Heckscher-Ohlin TheoremA country will export
    goods that are intensive in input abundant in the
  • A capital-abundant country will export the
    capital-intensive goods
  • The labor-abundant country will export the
    labor-intensive good.
  • Countries with abundance of natural resources and
    environmental amenities will export them -

Stolper Samuelson
  • A movement to free trade will cause the real
    return of a country's relatively abundant factor
    to rise, while the real return of the country's
    relatively scarce factor will fall.
  • The labor in a labor intensive country will
    benefits from trade, but the capital may lose
  • In the US which is relative to the rest of the
    world is capital intensive, labor loses from tree
    trade but capital gains

Gainers and losers from trade
  • Consumers - gain
  • Specialized Workers and owners in exporting
  • Specialized Workers and owners of assets in
    export sector
  • Labor moves among section- gains if labor
    intensive product is exported
  • Environment and future generation may lose if
    Natural resources are exported

Sad truth about trade
  • Trade may have bad effects, but sometimes the
    alternative is worst
  • Poor countries will sell their resources, their
    people may engage in the least desirable jobs
    producing export product
  • Trade polices do not follow text books- some
    governments may gain from trade in natural
    resources and enhance it
  • Dictatorships may lead poor countries to sell
    their citizens health and resources

Exporting the environment
  • Trade model assume competition- ignore dynamics
    and the fact that government may control

MC extraction plus future
International price of environment
MC of extraction
B actual mining of Environment A Optimal level
Poverty lead to taking more risks
  • "Value of life" is the cost saving of a
    "statistical" life as implied by safety
    regulations. "Value of life" in poorer countries
    is likely to be smaller than richer countries.
  • As countries become richer, environmental and
    safety regulations become stricter. Production
    activities are less pollution intensive
  • International trade may lead to the concentration
    of waste material, lower environmental quality,
    and lower human health in poorer nations.

Trade and waste disposal
  • Environmental quality may be viewed as
    consumption goods that are empirically found to
    have high-income elasticity. They will be
    consumed more intensively in richer countries.
  • Environmental quality characteristics and human
    health may be viewed as inputs in the production
    process. Poorer countries have relatively more
    of these inputs (relative to, say, capital)
    therefore, they should
  • Specialize in pollution-intensive products.
  • Adopt technologies that are intensive in
  • Provide waste disposal services.
  • Have more unrestricted worker safety and
    human health regulations.
  • .

Ownership politics and trade
Private Externality cost
Privateexternal lityfuture cost
IF the owner Of waste disposal facility does
not Pay for the Externality cost And is
myopic trade is bad
Demand for Waste disposal
Private Marginal cost
The race to the bottom
  • Does trade lead to deterioration of environmental
  • Less regulation may provide an edge
  • But greener technology may lead to tougher
  • Evidence of races to the top and bottom
  • Always higher income lead to greener emphasis
  • Barriers to trade and reduce opportunity
  • May lead to neglect and deerioration

Trade and waste disposal continued
  • Laws and safety standards in developing countries
    may cause loss of jobs in developed nations,
    which will lead to a call for "harmonization" of
  • Some waste accumulation activities in poorer
    nations may be objectionable because of their
    irreversible outcomes and impacts on future
  • Income distribution considerations also affect
    safety regulation and environmental regulations.
    Comparing countries with equal average income,
    the countries with more uneven income
    distribution are likely to export worker safety,
    and some aspects of environmental quality may
    import other aspects (for the very rich).

Gains from trade barriers
  • Because of the gains from trade, trade limits
    provide lucrative opportunities
  • Barriers of movement of commodities and labor may
    lead to illegal smuggling
  • Crime will rise near border towns
  • Crime includes smuggling of illicit drugs,
    migrant and natural resources
  • Restriction of natural resources wild life
  • may induce illicit activities-poaching
  • Require sufficient enforcement to fight crime
  • Barriers of trade may make some better off but
    society worse off

Trade and transfer of species
  • International exchanges include transfer of
    species (biodiversity) and technologies.
  • The discovery of America introduced Europeans
    to tomatoes, potatoes, corn, etc.
  • Australia expanded the range of tree species
    available for forestry.
  • There are gains from transfer of biodiversity but
    also losses.
  • Exotic species may dominate native species.
  • Transfer of species may lead to diseases and
    destruction if unchecked.
  • Rabbits in Australia.
  • Syphilis was brought to Europe from America.

Design of Institutional and policy solution for
species movement
  • Policy mechanisms to optimally transfer species
    and to protect against undesired transfers of bio
    matters. Some mechanisms include
  • Quarantines
  • Ban on transfers of certain materials.
  • Compensation for the use of genetic materials are
    issues of policy concern.
  • How much should developing nations be paid for
    the use of their species in developing medicines,
    new crop varieties, and other products?
  • How should the royalties for genetic materials
    within nations be distributed?

Shadow pricing and gain from smuggling
US Labor market
Mexico labor market
Extra wage For illegal worker
Global interdependency
  • Environmental consideration leads to
    interdependency between nations. There may be
    externalities between nations
  • Production externalities as in the case of
    acid rain.
  • Consumption externalities--people are
    concerned about human conditions and other
    countries, hunger, genocide, etc. People are
    concerned with environmental conditions in other
  • Correction of externality situations may require
    policies besides trade.
  • Transfer payments to reduce pollution
  • Aid to address undesirable situations
    (hunger, deforestation, etc.)
  • .

Possible global common problems
  • Humans share some resources globally. Without
    intervention to address free-rider problems,
    there may be nonoptimal uses of global common
  • Destruction of fisheries demonstrate the
    failure of laisse-faire approaches for global
    common resources.
  • Addressing problems of ozone depletion and
    global warming require collective action between
  • Example The gradual use of bans on methyl
    bromide, ban on aerosols, and others

Global interdependency
  • Humans share some resources globally. Without
    intervention to address free-rider problems,
    there may be nonoptimal uses of global common
  • Destruction of fisheries demonstrate the
    failure of laisse-faire approaches for global
    common resources.
  • Addressing problems of ozone depletion and
    global warming require collective action between
  • Example The gradual use of bans on methyl
    bromide, ban on aerosols, and others.
  • Because of shared benefits of biodiversity,
    developed nations are interested in the
    presentation of resources in developing nations.
    Transfer mechanization (forest for debt) is
    needed to assure such conservation activities.

Gains from trade may include improvement in
environmental quality
  • Trade may reduce the need to use toxic chemicals
    or pesticides.
  • Example Export of grapes and apples from
    southern countries (Chile) leads to the use of
    less storage in the northern countries.
  • Trade may lead to export of less polluting
    inputs. India will benefit from exporting.
    Cleaner coal for energy generation to reduce air
    pollution increases energy production.
  • Trade enables the production of trees and food in
    locations (warm climate zones) where the growth
    rates are much higher and preserves trees in
    areas with low growth rates.

Environmental barriers to trade
  • Environmental policy may be used as barriers to
    trade as international trade agreement leads to
    freer trade and reduces trade barriers.
    Environmental policy may be used as a means for
  • Food safety regulation may be used for
    protective purposes.
  • Agricultural policies are replaced with
    policies to protect "rural life styles."
  • Mechanisms are needed to identify where policies
    are genuinely developed for environmental
    protection and when they are used for protection
    of domestic industries.

Income and environmental protection
  • Environmental regulation may not exist or may not
    be enforced, particularly in poor countries.
    Water-borne diseases are major problems.
  • Developing countries with medium levels of income
    per capita (say, above 2,000/year) address
    severe pollution problems
  • Air pollution
  • Water pollution.
  • Protection against overutilization of natural
    resources occurs mostly in richer countries with
    GNP/capita of, say, above 5,000/year.
  • Rich countries will develop policies to protect
    resources that provide mainly aesthetic or
    consumptive benefits.
  • Economic development leads to increased demand
    for environmental protection but also increased
    use of energy and other resources.

Environmental and human well-being
  • GNP is a traditional measure of economic
    well-being of an economy, but it may overestimate
    economic well-being because it does not consider
    resource degradation and environmental quality
  • A partial answer is introduced by a new measure.
  • ANNP - Adjusted net national product.
  • ANNP GNP - DM - DN.
  • GNP Gross national product consumption
  • DM Depreciation of physical capital
  • DN Depreciation of neutral capital.

Environmental and human well-being continued
  • The correction of a national product will be
    greater in countries with a high rate of resource
    depletion (Mexico, Indonesia) than countries with
    lower rates of depletion (Costa Rica).
  • Other measures of well-being explicitly introduce
    measures of environmental and other aspects of
    quality of life. It is difficult to monetize
    environmental benefits or quality of life.
  • One approach is to weigh indexes of well-being
    (life expectancy, air pollution, water quality,
    population density) by monetizing coefficients.
    However, this approach is arbitrary.

  • A key issue is depletion of natural resources
  • NR can be classified as renewable (fish, forest)
    or nonrenewable (minerals).
  • A continuous extraction of nonrenewable resources
    will lead to their depletion in the future.
  • Renewable resources can be sustained if use does
    not permanently exceed the growth rate.

Sustainability continued
  • For many fisheries, wildlife, or forests,
    excessive extraction leads to reduction of stock
    and in some cases to extinction.
  • Sustainability is aimed to stabilize resource
    stocks at a socially desirable level. Many
    development processes may be fueled by excessive
    extraction--sustainable development aims to
    combine development and long-run survival.
  • It, therefore, leads to restoration policies of
    depleted resource stocks and thus temporary (or
    permanent) slowness in growth.
  • It requires monitoring of a natural system to
    account for natural capital stocks and leads to
    more ecological, sound management techniques.

  • Irreversibility Situations where future effort
    cannot correct for current or past damage. Death
    is irreversible.
  • Uncertainty Lack of knowledge about the
    performance of economic and ecological system.
    Uncertainty requires (1) learning and (2) caution
    in action.
  • Adaptive management Resource utilization
    approach that entails constant learning and

Modern approach to development projects
  • Feedback is a key in adaptive management
    strategies. Actions are taken (new technologies
    are tried and new incentives are introduced) to
    observe response which will lend to improving
    future policies.
  • Traditional management policies devise open
    loop systems that are designed to produce the
    best policies under average future conditions.
  • New management techniques (adaptive management)
    are close loop strategies that experiment
    identifying states and natures and then make

Modern approach to development projects continued
  • In the past many resource management projects
    emphasized structural solution. The best
    solution to a perceived water shortage was a
    water diversion project.
  • Now the emphasis is on nonstructural
    solution--introduction of an institution or
    incentive to modify behavior (for example, water
    markets). While market failure may be the
    cause for many pollution problems, lack of
    markets and property rights may be the source for
    other concerns.

Modern approach to development projects continued
  • Water is mainly allocated by queues (water
    rights), and water right holders are not allowed
    to trade them. Water markets may solve this
  • Lack of landownership leads to overgrazing and
    depletion of land quality. Land rights and
    trading may reduce this problem.

Technology and the environment
  • Perception Modern technology is a major cause
    of environmental degradation
  • Pesticides
  • Fertilizers
  • Reality Technology impacts depend on policy.
    Technologies have had strong, positive
    environmental effects.
  • (1) Higher yields prevented the need to expand
    land bases, thus, further reducing wildland and
    damaging biodiversity.
  • (2) Knowledge and technology are useful for
  • Detecting environmental problems
  • Restoration
  • Incentives may lead to pollution and

Kuznets Curve
  • Pollution per capita increases with incme and
    then declines
  • Environmental quality luxury good
  • Rich select cleaner industries
  • Have higher regulatory standards
  • Export their waste
  • Miniaturation

Global environmental problems
  • Climate change
  • Acid rain
  • Biodiversity
  • Ozone depletion
  • Fish stock depletion

Global environmental problems continued
  • Global resource problems are in most cases a
    bigger concern for developed nations.
  • There is a need for cooperation.
  • Developed countries demand to be paid to
  • Schemes like debt for nature require monitoring
    and enforcement to be effective.
  • A major issue is protection for the hardest-hit
    victims of problems (Bangladesh in case of global
  • Solutions to global problems erode the power of
    states and lead to the emergence of powerful
    international institutions.